It was a tremendous week of market volatility for every asset class on Wall Street. It is still all about inflation and what will be the reaction from central banks. A challenging inflation and growth mix have driven investor concerns that the Fed won’t be able to deliver a soft landing.
The upcoming week is filled with a wrath of central bank speak, world leaders meet, and economic data that could show signs that the economy is losing momentum. Fed Chair Powell will speak on Tuesday and he is expected to affirm expectations that the Fed will stick with a half-point rate increase in June. Most of the US economic data will likely show that the economy is seeing a slowdown with manufacturing activity and that the housing market is cooling, while the US consumer is still doing its best withstanding widespread price increases.
A big part of the inflation story is energy prices and many traders will pay close attention to both if the EU does delay a ban on Russian oil and if Iran is able to make any progress in reviving its nuclear deal.
The upcoming week is filled with a wrath of economic data and corporate earnings that will provide the latest update on the US consumer. Investors will still fixate over a wrath of Fed speak that should mostly confirm the Fed’s set course of tightening over the next couple of policy decisions.
King dollar has not provided any signs that it is ready to give up its crown, but that could change if risk appetite is able to find its footing. The stock market selloff is showing signs of exhaustion and if investors show they are ready to ‘buy the dip’, the dollar could be ripe for a pullback.
On Monday the Empire Manufacturing Survey is expected to show activity sharply decelerated in May. Tuesday is a big day, as traders will focus on the latest retail sales report that should show April was a better month of spending by the consumer, Walmart reports before the opening bell, and Fed Chair Powell’s gives an afternoon interview with the Wall Street Journal. Wednesday is mostly about housing data that should show that the market is cooling. Thursday will have another release of jobless claims which could show the labor market remains tight.
The BoE may not have been as behind the curve as other central banks but the country is still heading for more than 10% inflation and a recession if the central bank’s forecasts are to be believed. The data next week could indicate how pessimistic or, worse, optimistic these forecasts are. Unemployment, retail sales and CPI inflation make up the UK data dump next week.
We’ll also hear from some policymakers, although the message may not deviate too much from what we heard last week unless the data drastically surprises one way or another. The standout here is naturally the monetary policy report hearing which takes place on Monday in front of the Treasury Select Committee with Governor Andrew Bailey, Deputy Governor Sir Dave Ramsden, Jonathan Haskel and Michael Saunders in attendance.
It would appear the ECB has finally come around to the idea that the inflation problem is not going to solve itself, with numerous policymakers in recent weeks indicating that July is a live meeting once net asset purchases end. Even President Lagarde hinted at such, meaning once again a central bank has eventually come around to the market’s way of thinking. And probably too late to avoid substantial pain. With that in mind, the flash GDP and final inflation data will be eyed but it’s what policymakers have to say that will be most important. And next week, there’s plenty of them making appearances.
The EU is still working towards a Russian oil embargo that is facing opposition from Hungary while companies continue to look for workarounds to the rouble gas payment demands.
The Russian energy sector remains a key focal point in the markets as the country seeks to make life uncomfortable for “unfriendly” gas purchasers and the EU seeks to ban imports of its oil.
A light data week with preliminary GDP the only notable release on Wednesday.
The SARB is expected to raise interest rates by 50 basis points to 4.75% on Thursday in an attempt to finally get to grips with inflation, which is currently running at 5.9%; the upper end of its 3-6% range. April inflation data is released a day before the SARB meeting which may influence how aggressively they hike rates.
A quiet week for Turkey with tier three data only on the cards.
Shanghai covid-zero restrictions have been extended, and restrictions remain in parts of Beijing and across China. That keeps recession fears front and centre, while another China developer defaulted on foreign debt this week. With no signs of wider spread stimulus from government, the pressure remains on the Yuan. China seems quite happy to let the Yuan weaken, supporting exporters.
Mainland equities have shown an unnatural resilience this past week and I suspect China’s “national team” has been supporting dips. This will continue next week.
It is a heavy week .China data with Industrial Production, Retail Sales and M2 on Monday, and House Price Index Wednesday. All has downside risks and could push equity markets lower. Friday has the 1 and 5-year Loan Prime Rates. Once again, no cut to at least the !-year LPR will be negative for China equities.
Overall China equities and the Yuan remain at the mercy of global sentiment flows and developments in the covid-zero space in China.
India’s inflation printed well above forecast this week and a much higher WPI data release on Tuesday could increase the noise for another RBI rate hike in June. That could be supportive of the INR but is likely to be another headwind for equity markets.
Like other emerging markets though, the INR remains at the mercy of which way global sentiment is swinging day-to-day. A rise in oil prices next week will pressure the currency.
The Australian Dollar remains under pressure as global investor sentiment swings more heavily towards a deeper slowdown in China, and potential stagflation challenges elsewhere. Until that changes, any rally by AUD is likely to be short and sharp.
RBA Minutes on Tuesday could be temporarily positive for the AUD, but negative for equities, if it hints at a more hawkish stance going forward.
Thursday’s Employment data is always good for intraday volatility on the AUD and will have a binary outcome. Higher equals more RBA tightening equals lower equities, higher AUD and vice versa.
The NZD continues to suffer at the hands of negative global investor sentiment and a central bank that continues to be behind the inflation curve. The NZ Services PSI on Monday, Global Dairy Auction on Tuesday, and Balance of Trade on Friday have downside risks which will increase recession noise, weighing on the NZD and local equities.
USD/JPY remains solidly supported on dips with Thursdays fall looking more corrective than a turn in sentiment. Japans Machinery Orders Thursday, and Inflation on Friday are the main data points, but will have only temporarily impact.
The Nikkei 225 continues to shadow moves by the Nasdaq, while USD/JPY remains supported by the Bank of Japan’s dovish policy stance and the US/Japan rate differential. Only a sharp fall by US yields changes that narrative.
The odds of an out of sequence tightening move by the MAS are increasing as the Singapore Dollar remains under heavy pressure, thanks to its proxy role to China. That is undoing the work of the MAS which uses the exchange instead of interest rates to move monetary policy.
Soft Non-Oil Exports on tuesday could put more downward pressure on the currency and local equities.
Volatility in energy markets won’t be easing as the demand outlook faces great uncertainty with record gasoline prices, a close eye on China’s COVID situation, refining capacity concerns, and as the EU nations struggle on making progress with a ban on Russian oil. Iran nuclear talks are also approaching a critical juncture, with expectations somewhat pessimistic that a revival is imminent.
Oil will remain a volatile trade but it seems like energy traders should get used to seeing oil over $100 a barrel. The short-term outlook for crude is still mostly bullish as Europe’s air travel is improving, China’s COVID situation will hopefully improve in a few weeks, and peak driving season in the US is expected to be strong even with record high prices.
Gold’s rollercoaster does not appear to be ending anytime soon. Bond market volatility, especially at the front end of the curve, could still weigh on gold prices. If we’ve seen Treasury yields make a short-term peak here, gold could continue to stabilize above the $1800 level. If the end of week rebound does not have follow through into the new week, gold could see violent technical selling on a break below the $1790…